TORONTO, Dec 10 (Reuters) - The Canadian dollar finished
higher against the U.S. currency on Thursday after Canada
posted a surprise trade surplus in October after three months
of deficits.

After hitting its highest level in nearly a week, 95.43
U.S. cents, on the trade surplus data, the Canadian dollar
pared gains as the market took a second look at the composition
of the surplus. [ID:nN10154628]

Sales of metals and energy products fueled growth in
exports to the United States. But imports fell with a third
straight decline in machinery and equipment, which suggested
weak business investment despite a strong currency.

"A fair bit of that reaction came on the heels of the trade
numbers, which at first blush, was Canada-positive, then deemed
to be not quite as positive after looking at the split between
exports and imports," said Jack Spitz, managing director of
foreign exchange at National Bank Financial.

"So there was no follow-through buying of Canadian dollars
on the back of those numbers."

Analysts said the data still points to stronger
fourth-quarter economic growth, and that helped the currency
hold most of its gains.

Strength in equity markets, a barometer of risk, also aided
the Canadian dollar, as did a steady price of oil.

The Canadian dollar CAD=D3 finished at C$1.0504 to the
U.S. dollar, or 95.20 U.S. cents, up from C$1.0545 to the U.S.
dollar, or 94.83 U.S. cents, on Wednesday.

Spitz said there was a fair bit of noise in the market but
that most currencies were relatively flat for most of the day.
He said the market was watching for further weak links in the
global economy, after Greece's credit rating was cut this
week.

BONDS DROP

Canadian bond prices were lower across the curve, partly
because of Thursday's rise on stock markets.

Also, Canadian bonds took note of a poorly bid 30-year debt
auction in the United States, the second weak auction in as
many days, raising worries about financing the huge U.S.
federal deficit.

Canadian government bonds outperformed U.S. issues, with
the Canadian 10-year yield 13.3 basis points below its U.S.
counterpart, compared with 11.7 basis points the previous
session.

The two-year Canadian government bond CA2YT=RR fell 3
Canadian cents to C$100.07 to yield 1.216 percent. The 10-year
bond CA10YT=RR sank 33 Canadian cents to C$103.17 to yield
3.356 percent.

U.S. retail sales for November may set the tone for markets
on Friday, as investors watch for further signs of traction in
the U.S. economic recovery. Canada will publish its new housing
price index for October.
(Reporting by Ka Yan Ng; editing by Peter Galloway)